In a recently released Special Fraud Alert (the Alert), the US Department of Health and Human Services, Office of Inspector General (the OIG) declared that physician-owned device companies (PODs) that sell or arrange for the sale of medical devices ordered by their physician-owners are inherently suspect under the federal Anti-Kickback Statute (AKS). The Alert points out that “longstanding OIG guidance makes clear that the opportunity for a referring physician to earn a profit, including through an investment in an entity for which he or she generates business, could constitute illegal remuneration under AKS,” but the Alert is perhaps the OIG’s most definitive warning yet that PODs carry inherent risk of violating AKS.

Inherently Suspect, but Intent Controls

While the Alert can be applied to PODs generally, it focuses heavily on PODs of implantable medical devices because, according to the OIG, such devices are “physician preference items," meaning decisions about the type of device and choice of brand for such devices are typically made or strongly influenced by a physician as opposed to the hospital or ambulatory surgery center (ASC) where a physician sees a patient. Thus, although the OIG considers all PODs to be inherently suspect under AKS, the Alert acknowledges that not all PODs would necessarily result in an AKS violation. For example, a POD where the physician-owners are the sole (or nearly the sole) users of a device carry higher risk of fraud and abuse than a POD where the physician-owners are just a few of many users.

The OIG emphasizes the fact that whether or not a particular POD arrangement violates AKS will ultimately depend on the intent of the parties (i.e., whether there was intent to award or induce referrals), which may be evidenced in various ways such as the details of a POD’s legal structure, its operational safeguards, and the actual conduct of relevant players during the implementation phase and ongoing operations of the POD. Additionally, the Alert specifically notes that disclosing a physician’s financial interest in a POD to a patient is not sufficient to protect the POD from violating AKS.

Particularly Suspect Features

The Alert describes various features that are especially concerning in the POD context, such as arrangements with questionable manners of selecting and retaining investors, soliciting capital contributions, and distributing profits. Three specific examples of such questionable features are provided in the Alert – (1) selecting investors because of their ability to generate substantial business for the entity, (2) forcing investors who leave the service area or cease practicing to divest ownership, and (3) distributing extraordinary investment returns compared to the level of risk involved. According to the OIG, PODs that exhibit these or other suspect characteristics present four significant concerns which are often related to AKS violations – (1) corruption of medical judgment, (2) overutilization, (3) increased costs, and (4) unfair competition.

While not intended as an exhaustive list, the Alert lists the following suspect characteristics that are particularly concerning when exhibited by PODs or their physician-owners:

  • The size of the investment offered to each physician varies with the expected or actual volume or value of devices used by the physician;
  • Distributions are not made in proportion to ownership interest, or physician-owners pay different prices for their ownership interests, because of the expected or actual volume or value of devices used by the physicians;
  • Physician-owners condition their referrals to hospitals or ASCs on their purchase of the POD’s devices through coercion or promises (e.g., by stating or implying they will perform surgeries or refer patients elsewhere if a hospital or an ASC does not purchase devices from the POD, by promising or implying they will move surgeries to the hospital or ASC if it purchases devices from the POD, or by requiring a hospital or an ASC to enter into an exclusive purchasing arrangement with the POD);
  • Physician-owners are required, pressured, or actively encouraged to refer, recommend, or arrange for the purchase of the devices sold by the POD or, conversely, are threatened with, or experience, negative repercussions (e.g., decreased distributions, required divestiture) for failing to use the POD’s devices for their patients;
  • The POD retains the right to repurchase a physician-owner’s interest for the physician’s failure or inability (through relocation, retirement, or otherwise) to refer, recommend, or arrange for the purchase of the POD’s devices;
  • The POD is a shell entity that does not conduct appropriate product evaluations, maintain or manage sufficient inventory in its own facility, or employ or otherwise contract with personnel necessary for operations;
  • The POD does not maintain continuous oversight of all distribution functions; and
  • When a hospital or an ASC requires physicians to disclose conflicts of interest, the POD’s physician-owners either fail to inform the hospital or ASC of, or actively conceal through misrepresentations, their ownership interest in the POD.

Take Away

The Alert should serve as notice for all physician-owners of PODs that the federal government views PODs as carrying significant risk under AKS, and physician-owners should take steps to craft POD arrangements so that they do not include any suspect features, including those described in the Alert. Additionally, given that AKS ascribes criminal liability to both sides of an impermissible kickback arrangement, hospitals and ASCs should be on notice as well, as they are also at risk of an AKS violation in their relationships with PODs, and should thus tread carefully when entering into transactions with PODs. For that reason, hospitals and ASCs should be sure to avoid relationships where a purpose of purchasing devices from a POD is to maintain or secure referrals from physician-owners of a POD, even if there are other legitimate purposes for entering into the arrangement.